1/18/2002 @ 8:45AM

The Scapegoating Of Arthur Andersen

In an act that combines a large dose of ingratitude with a heaping helping of chutzpah, the
Enron
board of directors fired
Arthur Andersen
as the company’s auditor.

Enron
Special Report: Enron’s Endgame
“While we had been willing to give Andersen the benefit of the doubt until the completion of [an internal] investigation, we can’t afford to wait any longer in light of recent events, including the reported destruction of documents by Andersen personnel and the disciplinary actions taken against several of Andersen’s partners working in its Houston office,” said
Kenneth
Lay
Kenneth Lay
, Enron’s
chairman and chief executive, in a statement.

In a related development,
Harvey
Pitt
Harvey Pitt
, chief of the Securities and Exchange Commission, proposed yesterday that the accounting industry should be supervised by a new group dominated by outside experts. The SEC said it would offer a specific proposal in 60 days.

Isn’t Enron firing Andersen a little like O.J. Simpson evicting Kato Kaelin because he didn’t wake up and catch that prowler? Whatever Andersen did wrong–and it seems it did plenty wrong–it did it to benefit Enron. Indeed, the reason Andersen’s actions are scandalous is because Andersen may have abandoned its legal duty to public shareholders in favor of protecting the interests of its client Enron, from whom it received $1 million a week in auditing and consulting fees.

Since the Enron bankruptcy on Dec. 2, Andersen CEO
Joseph
Berardino
Joseph Berardino
has been out front trying to save the reputation of his firm, whose reputation and very corporate existence are threatened by its Enron engagement. Meanwhile, Lay and other top Enron executives have been out of sight, hiding behind lawyers and spokesmen (see Lay-ing Low).

But the books and records in question were prepared first by Enron before they were certified by Andersen. While there is plenty of blame to go around, the prime mover in the scandal is Enron and its executives. Wall Street firms that issued Enron securities and then paid analysts to tell the public to buy them–which they did until weeks before the final collapse–are also probably at least as culpable as Andersen.

Andersen knew or should have known what Enron was doing. It stood by as Enron pushed to the edge of the accounting envelope and beyond (see Enron The Incredible). But it was Enron’s envelope, not Andersen’s. Andersen can be faulted for not telling Enron “Stop!” But it wasn’t Andersen that said “Go” in the first place.

Andersen spokesman Patrick Dorton told reporters the firing was “no surprise to anyone…. As a matter of fact, our relationship with Enron ended when the company failed and it went into bankruptcy.”

Andersen has been doing some scapegoating of its own, firing the partner in charge of the Enron engagement because he ordered the “expedited” destruction of documents relating to the Enron audit. The partner,
David
Duncan
David Duncan
, said he acted pursuant to firm policy and the advice of its lawyers. Now he has hired his own lawyers from the Wall Street firm Sullivan & Cromwell and is cooperating with congressional investigators.

All this finger-pointing, while inevitable, violates known principles of public relations. It violates the advice of Don Corleone, who said, “Keep your friends close, but your enemies closer.” It violates Texas’ own Lyndon Baines Johnson, who said (about J. Edgar Hoover), “It’s probably better to have him inside my tent pissing out than outside my tent pissing in.”

Enron’s termination of Andersen may be a prelude to a lawsuit against the accounting firm. But as the various investigations into the Enron Affair unfold, the accountants could return the favor. Some of the best witnesses against Enron may come from Andersen.

In support of its action, an Enron lawyer cited a February 2001 memo in which top Andersen officials, including Duncan, voiced concerns about possible conflicts of interest and inadequate public disclosure of “off-balance-sheet” Enron partnerships. Enron faults Andersen for not then taking these concerns to the board.

“There’s no resemblance between the concerns that Arthur Andersen expressed internally in this meeting and the assurances they gave the audit committee that everything was well,” Enron lawyer Robert Bennett told reporters.

At the meeting, Andersen discussed “conflicts of interest” relating to
Andrew
Fastow
Andrew Fastow
, Enron’s chief financial officer at the time. Fastow was eventually paid $30 million for managing off-balance-sheet partnerships. Whether the existence of these partnerships, or their use to hide debts actually owed by Enron, was properly disclosed was also a topic of discussion at the meeting.

Andersen, for its part, called the meeting and the memo routine: “The memo was prepared to document our annual risk assessment of the Enron engagement. This was a routine, required meeting consistent with our policies and practices,” the firm said in a statement.

More to the point, saying Andersen failed to warn the Enron board implies that the board needed warning. If it did, that warning could have come from Fastow; from
Jeffrey
Skilling
Jeffrey Skilling
, Enron’s CEO at the time; from countless others; or from Lay. Lay’s protestations at this point are just sad.